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Ringing the changes

Sir Neville Simms' new company Carillion starts trading at the end of July.He explains his strategy to Jackie Whitelaw.

Sir Neville Simms thinks of himself as a crusader. He believes that people generally and the City specifically do not appreciate how good a business contracting really is. And he plans to use his new company Carillion to show them how wrong they are.

Carillion is the new name of Tarmac's contracting business, now well on the way to demerge from Tarmac Group after shareholders approved the move on 8 July. By the end of the month the new company should be a reality with Sir Neville in charge as chairman and chief executive.

Carillion is a contractor but with a very small c. The 14,000 strong company will continue to carry out mainstream construction work, but like most other major firms in the sector its management believes the best opportunities for growth in workload and earnings are maintenance, facilities management and private finance schemes. 'We are a construction services group,' says Simms 'with contracting as one of the things we do.'

Recognition by investors of the benefits of operating a cradle to grave business is crucial to the company's success, Simms says. He hopes that when they understand the potential of Carillion, the company will achieve the doubling in shareprice it is aiming for and in the process rehabilitate contracting generally in the minds of investors. In his column for NCE on 8 July Simms claimed the City was already beginning to realise that contracting was undervalued.

'This is why we split the Tarmac business,' he says. 'No one was giving any credit or value to the construction company. If you took out the value of the rock (Tarmac's aggregates business) and then worked out the price of construction, the analysts said we were worth nothing.

'Yet we were at the top of our peer group. We had to go out on our own.'

Simms says the Tarmac business had recognised the inevitability of a split as far back as 1995 when the board considered dividing the company into three; 'but the balance sheet wouldn't stand it'. The group then looked to merge its aggregates business with Aggregate Industries which would have left construction out on its own. When the merger fell through Tarmac opted to split the company anyway.

'It was time for construction to move on. When Tarmac was building a lot of roads the link between aggregates and construction made sense. Now our road construction turnover is down to 11% to 12% of the total and rail is filling the gap. It is time for the child to leave home.'

Simms says there has been a huge change in the character of construction work in the last decade. 'A third of our current business didn't exist 10 years ago and that third is now making half our profit.'

In recognition of that change, Carillion is dividing the company into five new segments (see box). They are Building, Infrastructure Management, Services, Private Finance and Capital Projects. 'Our builders and civil engineers operate tightly run ships and Capital Projects and Building are the two strong foundations of the company. We will use that business to provide the resources and cash to build new businesses in the other three areas which is where we expect the best growth will come.

'We are not trying to give the impression that we've given up contracting. Some companies are saying they want to move out of the sector. Carillion doesn't. There is a lot of joy in construction. But the industry has to find a way of producing transparent results so we are respected in the City and properly paid.'

Sir Neville plans to do that by reorganising the financial reporting structure of Carillion so everyone can see and benchmark the value of the group's five key activities over time. Each business area will have turnover and profit reported from the 1999 preliminary results.

If the other contractors in the premier division followed his result reporting style he says, the City would soon gain confidence in contracting. 'Low margins are not a reason for lack of confidence from investors. What people don't like about contractors is our volatility and the fact that they can't see if our low margins are real.'

There are a more than a few sceptics who expect to see the newly launched Carillion quickly swallowed up by another major contractor keen to lay hands on its £1.8bn turnover and £200M market capitalisation. Amec and Skanska are already being touted as possible purchasers. Simms himself is on record as saying UK contractors need to get bigger as well as better if they are to compete successfully.

'We don't want to be taken over and I don't honestly think it a reasonable prospect,' he says. 'Successful contracting depends entirely on people. If they don't want to work for someone they leave, so a takeover is always a risk. Most contracting is large chunks of goodwill and I don't believe anyone else can manage Carillion better than us.

'But I can't discount the appearance of someone with a big cheque book, although no one has turned up to buy others like Bovis and Mowlem. If Skanska is interested, from a shareholder's point of view then fair play to them, but I don't think they are.'

It might be Carillion waving the chequebook. A key plank of the company's strategy for growth is to make acquisitions (see box). Carillion has a strong balance sheet, thanks to what one analyst described as a very clever move by Simms in extracting the construction business from Tarmac with no debt. It allows Carillion to continue developing its private finance portfolio and means it is happy to stick with its bid to run one of the London Underground deep tube lines in partnership with Amec and Alstom.

Liabilities also remain with the 'new' Tarmac though Carillion has agreed to indemnify against them. There are a few claims to be wrapped up, for example on the River Lee immersed tube tunnel in Eire and the Jubilee Line (NCE 24 June). Sir Neville says he is unconcerned. Carillion has more than enough cash to deal with any unforeseen demands on its reserves.

He is determined to double Carillion's shareprice in three years and has put in place a scheme to encourage his top management to focus hard on that ambition.

The Founders Equity Plan allows them to buy shares which Carillion will match with an additional four free shares if they hit performance targets. Existing shareholders have been grouchy about the plan, and described it as Sir Neville's retirement fund.

Sir Neville is unrepentant. 'I am determined to focus on shareholder value. I need people committed to that and I want them to benefit.

'The scheme is certainly not my retirement fund. If I hadn't got that sorted out in the 30 years I have been in this business then I have not been trying hard enough.'

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